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Unformatted text preview: ANDERSON CLAYTON
COMPANY EQUIPMENT REPLACEMENT Anderson Clayton Company (ACC) is a multinational ﬁrm with total
revenues in excess ot‘ $4 billion per year. The tirm is made up of tour
maior lelSlOllS, grains, pet foods, agricultural feeds, and consumer
products, Each year each divrsion submits its capital budgeting requests
to ACL‘ headquarters in Kansas city Each plant witlun each division
submits its own eapital requests to division headquarters approximately
two months bet‘ore divisional requests are sent to Kansas City. Michael t'aschall is in charge ot‘ engineering; at the Louisville plant
that primarily p 'oduces pet t'ood The plant produces both wet and dry
tood tor a Wide group at pets, t‘rorn tropical ﬁsh to show dogs Michael's
iol) includes determining the capital asset needs otthe plant and prepare
mg the capital budget request that is sent to divrsional headquarters
each year In determining the capital needs, each department Within the
plant is asked to submit its requests Each request is descriptive in
nature and includes the Cost of the major pieces ot equipment. A [TV(’*
person comnutce, one member from each department, then meets and
decides which projects seem to have the most merit, /\ complete analy
sis is then prepared {or the group ol‘ projects that is selected PRODUCTION OF DRY PET FOOD .»\t the Louisvil e plant, the dry pet tood pellets are prt'iduced through an
estrus-ion process The prot ess begins with the gl’tlldlllg otall grains into
it meal, the dilerent grains are then mixed With other ingredients, in~
“WW-i Vitanu is, in 3~ton ttll‘LCt'S liach jiton mix is called a batch. the
process ie; not ,inlike what an mdtvtdudl would dowlien littliilllg a hatch ll9 I20 PART IV CAPITAL BUDGETING ol pancake mix or bread dough Each batch is then :noved through a
system ot' conveyors and elevators into a holding bin above pellet mills In the Louisville p ant there are four pellet mills, each driven by a I207
horsepower electric motor and rated at a capacity ol' 10 tons per hour.
The mixed ingredients are led by a conveyor into the top olthe pellet mill
where steam is added to the dry mix as a binder. The wet mixture is then
torced through a fixed die. The. die is a round steel drurrr about L5 feet in
diameter and about 3 inches thick. (A die looks like a car tire in size and
shape ) ’t he die contains hundreds of holes all the same. diameter. Three
rotating rollers roll around the inside surface ot‘ the die, forcing the in»
gredrents through the holes On the outside of the die a rotating knite
cuts the extruded pellets otl'at various lengths depending on the type of
pet I‘ood being produced These hot pellets are then conveyed to a cooler, which cools and drys
the pellets The drying process rs needed bel‘ore the pet lood is bagged to
reduce the moisture; il‘ the pellets had a high moisture content betore
being placed in a paper bag or a cardboard box, they would "sweat" and
then mildew in the container. Alter drying, the, pellets are held in a bin
above the bagging and sewrng line The bagging and sewing operation
is highly automated a measured amount of the pellets is dumped into a
paper bag and the bag is sewed shut, The bags are then moved on
torweyors to the warehouse, where they are stacked on pallets ready lor
shipping to grocery and other retail stores‘ distribution centers Currently the four pellet mills are producing an average of 400 tons of
pellets per 12rhourday. The plant has two full shifts, but the pellet line
runs only lz hours The mill, which is rated at 10 tons per hour, is
producing only 8.3 tons per hour. The reason tor this seeming inetli
ciency is that a cleaning-out process is required after each type oft‘eed is
run through the dies. the cleaning process is needed to push the last ol'
the previous batch out through the dies before the new batch is started,
The length of each run is constrained by the amount of available ﬂoor
space in the warehouse and an estimate on the amount of orders that
Will be received. (A run is the number ol‘ batches of a single type of pet
['ood that is producgd before stopping and switching to another type of
pet tood) The best way to achieve greater production efﬁciency is to
have longer runs and/or produce more pellets per mill. For this reason,
Michael has been looking at a new pellet mill that is produced by the
Calrt’ornia Pellet Mill Company. CALIFORNIA PELLET MILL CLllil‘OI'nm l’ellet Mill Company, a major manutacturer ol’pellet mills, has
introduced a new pellet mill that is rated at toe tons per hour. Based on
the current production etliciency, the actual production rate would be CASE 20 ANDERSON CLAYTON COMPANY [21 8.82 tons per hour. The new pellet mills will cost $l00,000 each, includ«
ing installation. it {our new mills are purchased, a one—time $l5,000
improvement in the steam line to the mills will be required. The new
pellet mills would be depreciated over a five-year period according to the
Moditied Acceleraton Cost Recovery System (MACRS) that was created
by the Tax Reform Act of 1986. (Depreciation rates are given in Exhibit
t.) The tour old machines have been fully depreciated but could be sold
as junk (or $5,000 each. It the four new mills are purchased there would
also be a net increase in working capital of $12,000. THE CAPITAL BUDGETING PROCESS AT ACC Among other capital projects, the plant capital budgeting committee
thinks that the purchase of the new pellet mills should be given a high
priority. Paschalt kTOWS that he must present any capital budgeting ref
quests before the divisional capital budgeting committee. Each year he
is given certain guidelines for the preparation ot‘ capital requests
Among these guidelines are the specific instructions for preparing the
capital budget requests. It was noted in this year’s instructions that the
cost ot‘ capital l'or plant production is [5 percent and the company has a
combined state. and federal tax rate. ot'jts percent for its Kentucky plants. The Louisville plant Operates ﬁve days a week and 50 weeks a year t t 0
holidays) with the pellet tine averaging 12 hours ol’ operation per day.
The average sales price per ton of pet food is $280. The raw materials
cost $152 per ton, and operating costs -inctuding all overhead selling,
and administrative expenses “are $l08 per ton. Both sales and costs
are expected to increase 6 percent per year over the sevenyear eco
nomic lite ot‘ these mills /\t the end of their economic lite the mills are
expected to have a salvage value ot‘ $10,000 each QUESTIONS I. Determine the initial net cash outtlow for this project 2. Determine the net cash llows (years i to 7) it‘ the new pellet mills are
purchased . Calculate the NPV for the pellet mill project.
. Calculate the IRR for the pellet mill project
. What ts the payback for the pellet mill project“ . Should ACC invest tn the new pellet mills" NOW-Aw . jm. What magjmg hCSIdCS those presented in this curse nnght this
project be unacceptablc? Ill PART |V CAPITAL BUDGETING 8. How would you respond if a member of the divisional budget com
mittee made the. comment at the end ofyour presentation that he
was against the project because it only made a proﬁt of $100,00W EXHIBIT l Depreciation Rates for MACRS Property
Recovery Year 3-Year 5~Year l 33 .33 96, 20 00%
2 44 45 712.00
3 148! 19 20 ‘1 7 42 1 1,52 5 l l 52 D 5776 ...
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